China’s Economy – Rare Earths and What they Don’t Tell You…

Today the BBC reports on a case raised by the United States against China in the matter of rare earth controls. You can find it here.

This is Bayan Obo in Inner Mongolia between this single location and the mud flats of Guangdong Province (which is where I live) - 95% of all the world's rare earth minerals are extracted. This comes at a huge price to the natural environment as you can see from this picture.

What they don’t tell you in the article and what should be key to understanding this issue is this – the United States has plenty of rare earth minerals lying around in the ground. In fact until a few years ago the United States was a major producer of rare earth – right up until the point that it realized that not only could the job be done for less in China, but that extraction is indeed environmentally damaging and thus the Chinese environment could pay the price of American product development.

Now that China has worked this out, and no longer needs to depend on absolute destruction of the environment for cash – it’s not playing the game anymore. The Americans are of course livid about this. They closed their mines on the understanding that the Chinese would continue to take their hit for them – and now that rare earths are an essential part of high-tech industry, it’s going to take a few years to reopen them.

Rather than viewing this as a tax on their exploitation of the Chinese, they’re suing instead. And the Europeans and Japanese can’t be smug about this – because they’ve joined in too.

Rare earths make for some pretty compounds. There are 17 of them all told and most are as common as any other element lying around, though they are hard to extract in pure form (which is why they are considered "rare" - it took a long time to get at them for early chemists). And yes - you use rare earth metals in your day to day life - anything that has a speaker in it, will contain a rare earth mineral in the magnet (for a small example).

This should be salutary lesson in not handing over control of a key part of your industrial process to economic competitors in exchange for being able to crap on their doorstep. But it won’t be – it’ll be another reason to pillory the “evil” Chinese rather than admitting that there might just be a lot at fault in the way the West does business.

Finally it’s worth noting that rare earths generally aren’t in the slightest bit rare – and can be found all over the world. So it’s not like the Chinese are hogging an unavailable resource – they’re just encouraging us to do our own dirty work for a change.

I think China must also remember that most industries only went to China for cheap resources. If these are no longer available, the industries will go elsewhere. Though maybe rare earths are a different case, because of difficulty in extracting them.

As I understand it, the fact that a country like the US is able to produce the materials doesn’t matter. According to WTO rules, as long as you’re producing something, you have to adhere to the rules fostering non-discrimination, reciprocity, etc.

If this were really about the environment, domestic costs would be going up just as much. They’re not, which pretty clearly indicates that this isn’t an acceptable non-economic objective — it’s really about supporting domestic manufacturers at the expense of international ones.

Good point. 🙂 I think there’s more to it than that though – it is acceptable for companies to charge what the market will bear, and to offer discounts to anyone they should choose to. This is how Microsoft quickly re-established itself as the dominant OS provider on the Netbook platform – by making discounts on other OS installs dependant on Netbook platform costs for example.

So the abuse of monopoly argument (which is the backbone of this case) has to be rendered in terms of supply availability – if China was the only source of these products, it would be breaking WTO rules (as I understand it) but it’s not, it’s using a market economy – exactly the way it’s supposed to be used. But it’s got knickers in a twist because for a change it’s the developing nation exploiting a weakness rather than the developed nations.

i heard that in the middle east, oil prices are drastically low locally, yet oil prices exported are far higher have been growing higher every year. i don’t know much about trading legalities, but i see monopoly of gas and oil being far worse than china manipulating resources, especially if they aren’t really rare.

News stories falsely report that because China actually possesses most of the world’s rare earths. I’m not sure if that’s a knowledge fail or just trying to whip people up, but at least there are a few level headed people out there like yourself who know what the deal is.

I think it’s lazy reporting – journalists generally aren’t economists or scientists, they’re English grads, they read “95%” and assume that because China provides this much – it has this much. Cheers. 🙂